A “Fair” Personal Credit Score Can Cost You

We’ve talked before about how a low personal credit score makes it harder to get a small business loan—along with how a good personal credit score often leads to more favorable loan terms and lower interest rates.

Credit.com has introduced a Lifetime Cost of Debt calculator that gives you visibility into what credit might cost over your lifetime depending upon your personal credit score. They make some average assumptions (which you can adjust within the tool), but here’s how the lifetime cost of debt numbers pan out for a for a 30-year-old man living in New York:

Fair Credit (620-679): $606,086

Good Credit (680-739): $523,039

Excellent Credit (740+): $481,390

It’s amazing how the bump from “Fair” to “Good” reduces the cost of credit over a lifetime by $83,047. And, an excellent credit sore reduces the cost by $124,696.

Even more expensive, the lifetime cost for a poor credit score (550-619) is a whopping $759,490 and a bad credit score (below 550) is almost $1 million dollars ($915,754).

The credit.com calculator doesn’t take into consideration the costs for a small business owner, but they are there. At the very least, lost opportunity costs. Many small business owners borrow capital to fuel growth and expansion so anything that hampers their ability to access capital can become very expensive. Possibly even more expensive than the extra interest he or she might pay over the lifetime of a small business loan.

In the context of both personal and business terms, the need to build and maintain a good personal credit score is very important, and maybe even goes without saying. With that in mind, here are three things you can start doing today to help build (or even rebuild a solid personal credit score:

1. Make sure the credit bureaus are telling the right story: It’s not uncommon to find errors on your personal credit report. And, left uncorrected or ignored, they can lower your score. Fortunately, all three of the major personal credit reporting bureaus (Experian, Equifax, and Transunion) have formal dispute processes that allow you to correct any verifiable mistakes on your report. Additionally, if there are extenuating circumstances like a prolonged illness, death of a spouse, or divorce that may have contributed to a less-than-perfect score, all three of the major bureaus will allow you to append up to a 100-word statement that explains the situation.

2. Get current: Probably the biggest single thing that will improve your score is getting current with your obligations and staying current. There is no shortcut to improving a poor credit score. While it might take time, a dedicated effort to get and stay current can yield visible results in 12 months. While you might not be able to go from poor to great, it could be enough to help you move from fair to good or from poor to fair. Slow and steady wins this race.

Try to get your credit usage down too. 30 percent of your personal credit score is directly related to how much credit you use compared to how much credit you have available. A good rule of thumb is to shoot for around 15 percent.

3. Use credit wisely: This might sound obvious, but for many of the same reasons mentioned above, this could make a difference in your score. However there’s a little more to it than lowering your credit balances. First, don’t cancel any of your current credit accounts. The length of your credit history is important and older accounts help your score—roughly 15 percent of your score.

It’s also important to demonstrate that you can use different types of credit accounts, which amount to about 10 percent of your score. In other words, don’t max out your available credit and don’t always use the same credit card.

Building a strong personal credit score (or rebuilding a blemished score) doesn’t happen overnight. Avoid the temptation to shuffle your credit usage between different accounts. It’s very apparent to the credit bureaus and won’t do anything to improve your credit—and my even hurt you. Beware of anyone who claims to have a quick fix for a bad credit report. There is no quick fix. What’s more, it’s unlawful to charge an upfront fee for credit repair services so anyone who wants to charge you prior to helping you should be avoided. You should also know that using a different social security number or creating a different alias could land you in legal hot water.

Following these three suggestions will not only help you build a strong personal credit profile which could save you tens of thousands of dollars over your lifetime, they may also help you qualify for a small business loan to help your business grow and thrive.

I write about small business and small business finance as Editor for OnDeck. With over 30 years in the trenches of small business, I’m a Main Street business evangelist, author, and marketing veteran that makes the maze of small business lending accessible by weaving personal experiences and other anecdotes into a regular discussion of one of the biggest challenges facing small business owners today.

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